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  1. 1. MODULE-5 What is Price? Economists defines price as the exchange value of a product or service always expressed in terms of money. To the consumer the price is an agreement between seller and buyer concerning what each is to receive. Price is the mechanism or device for translating into quantitative terms (Rs. & Ps), the perceived value of the product to the customer at a point of time. Pricing is equivalent to the total offering. The offering includes a brand name, a package, benefits, service after sale, delivery, and credit and so on. Money (price) = Bundle of expectations or satisfactions. A firm must set the price for the first time 1) When it develops a new product 2) When it enters into a new distribution channel/ geographical area and 3) When it caters bids on new contract work. Price setting procedure: 1) Selecting Pricing objective Many companies first decide where it wants to position its market offering. If pricing objective is clear, it is easier to set price, ex: - survival, maximum market share, maximum profit, product quality, leadership. Prices are less important than survival. As long as prices cover variable costs and some fixed costs the company stays in the business. For non profits organization partial cost recovery or full cost recovery will be the objective. They rely on private gifts and public grants. 2) Determining Demand: Demand and price are inversely related; the higher the price; the lower the demand price sensitivity:- The first step in estimating demand is to understand factors which affect price sensitivity, Nagle identified nine factors: 1) Unique value effect: - Buyers are fewer prices sensitive if product is more distinctive. 2) Substitute Awareness effect: Buyers are less price sensitive when they are less aware of substitutes. 3) Difficult comparison effect: Buyers are less price sensitive when they cannot easily compare the quality.
  2. 2. 4) End Benefit Effect: Buyers are less price sensitive of product has smaller cost of production of end product. 5) Total Expenditure Effect: lower expenditure when compare to their total high income 6) Share Cost Effect: Buyers are less price sensitive when a part of the cost is borne by another party. 7) Sunk Investment effect: When the product is used in conjunction with assets previously bought. 8) Price Quality Effect: when product is assumed to have more quality, prestige or exclusiveness. 9) Inventory Effect: When they cannot store the product. 3) Estimating Costs: Company wants to change a price that covers its costs of production, distribution and selling cost and plus a fair return for its efforts. Types of costs/Levels of Production: Fixed cost and variable costs Fixed costs are the costs and don’t vary with production or sales revenue. [Ex: - Rent, heat, interest, salaries and so on] regardless of output. Variable costs are those costs which vary directly with the level of production. Total cost = Fixed cost + Variable cost. Average cost = Cost per unit (or) Total Cost Production 4) Analyzing Competitors cost’s prices and offers: First must take competitors costs, prices and possible reactions into account. If firm’s product is similar to a major competitors offer, then the firm will have to price close to competitor’s price 5) Selecting Pricing Method: Market price, Target return pricing, perceived value pricing, going rate policy, sealed bid pricing and so on. 6) Selecting the final price: Must consider additional features like psychological pricing Ex: - Rs.999 out of Rs.1000 price as an indicator of quality. Influence of other marketing mix elements.
  3. 3. PRICING METHODS 1) MARKUP PRICING: It is a method to add up a standard markup to the products cost. Variable and fixed cost per unit is added and the desired profit margin is added to the total cost. Ex: - Variable cost (V.C) per unit = 10 Fixed Cost = 3, 00,000 Expected unit sales = 50,000 units Unit cost = Variable cost + Fixed cost Unit sales = Rs. 10 + 3, 00,000 50,000 = Rs. 10 + 6 = Rs. 16/- Mark up price = Unit cost 1 – Desired return on sales = Rs. 16 1-0.2 = Rs.20/- Companies introducing a new product often price is high to recover their costs as rapidly as possible. 2) TARGET RETURN PRICING:- Target rate of return on investment (ROI) Investment = Rs.10, 00,000. Wants to set price to earn 20% ROI Target Return Price = Unit cost+ desired profit + Invested capital Unit sales = Rs.16 + 20 x Rs.10, 00,000 50,000 =Rs. 16+4 = Rs. 20/- Break Even Volume = Fixed Cost
  4. 4. Price – Variable cost = Rs.300, 000 Rs.20 – Rs.10 = 30.000 units. Break Even Analysis The sales price per bag to the dealer is Rs.70 If variable costs are equal to Rs.35 and selling and other direct expenses are Rs. 15. The total variable cost is Rs.50 The contribution to profit and overhead per unit is Rs.20 (Rs.70-Rs.50) Unit Contribution = Selling price- variable costs to fixed costs per unit per unit Selling price = Rs.70 per unit Variable cost= Rs.50 per unit [Rs.35 + Rs.15] B.P. = Rs. 20per unit Fixed cost = Rs.100, 000. B.E.V. = F.C FC SP - VC OR Contribution B.P= 1, 00,000 1, 00,000 70 – 50 = 20 = 5,000 units. To obtain Break Even Point in rupees, 5,000 units are multiplied by selling price Rs. 70 per unit B.P = Rs. 70 x 5,000 units = Rs. 3, 50,000 If the selling price is Rs.70 per unit, the BEP is BEP = 1, 00,000 1, 00,000 75 – 50 = 25 = 4,000 units. 3) PERCEIVED VALUE PRICING: See the buyers perceptions of value not the sellers cost as a key to pricing. They use other marketing mix such as advertising sales force, to build perceived value so buyers mind. If customers perceive prices to be higher than the value that they receive from the product, they switch over to competitors products. If the prices are lower than the perceived value of customers, the company is losing out on profits that could have accrued by charging higher prices. 4) VALUE PRICING: Several companies have adapted value pricing in which they charge a fairly low price for a high quality offering.
  5. 5. 5) GOING RATE PRICING: Price is more or less then competitors demand and supply. All companies charge the same price and smaller players follow the price set by market leader. 6) SEALED BID PRICING: Concentration is how competitors will price rather on a demand and supply. The firm wants to win contract and winning normally requires submitting a lower price bid. 7) MARKET ORIENTED PRICING: Rapid skimming pricing: - High price and high promotion expenditure Slow skimming pricing: - High price with low promotional expenditure Rapid penetration pricing: - Low price with heavy promotional expenditure Slow penetration pricing: - Low price with low promotional expenditure Factors Influencing Pricing Decisions: 1) PRICE QUALITY RELATIONSHIP Customers uses price as an indicator of quality. Price strongly influences quality. If a product is priced high, the customer perception is that the quality of the product must be higher. 2) PRODUCT LINE PRICING Some companies prefer to extend their product lines rather than reduce price of existing brands. They launch cut-price fighter brands to compete with low price rivals. This has an advantage of maintaining image and profit margins of existing brands. 3) EXPLICABILITY The company should be able to justify the price what it is charging for a product. Consumer product companies have to give clues to the customers about high quality. 4) COMPETITION A company should be able to anticipate reactions of competitors to its pricing policies and moves. Ex: - A company reduces its price to gain market share one or two competitors can decide to match the cut, because they can easily copy. But all competitors are not same and their approaches and reactions to pricing moves of the company are different. 5) NEGOTIATING MARGINS Actual price paid is less than list price because company offers order-size discounts, fast payment discounts, bonus and promotions.
  6. 6. 6) EFFECT ON DISTRIBUTORS & RETAILORS Sometimes list prices will be high because middlemen want higher margins. But some retailers can afford to sell below the list to customers by managing themselves with lower costs. They pass on some part of their own margins to customers. 7) POLITICAL FACTORS When the price is out of ling with manufacturing costs, political pressure may act to force down prices, intention is to abolish monopoly pricing 8) EARNING VERY HIGH PROFITS The pioneer companies are able to charge high prices due to lack of alternatives to the customers. The company’s high profits induce competitors to enter market. The entry of competitors puts tremendous pressure on price and the pioneer company is forced to reduce its price. But if the pioneer company is satisfied with lesser profits. It can keep competitors away for a longer period of time 9) CHARGING VERY LOW PRICES Customers believe that adequate quality can be provided only at the prices being charged by the major companies. If a company introduces very low prices customers suspect its quality and do not buy the product inspite of low price. DISCOUNTS AND ALLOWANCES Discounts and allowances are price concessions offered to traders or buyers in the form of deductions from the list price of from the amount of a bill or invoice. Trade Discount: Trade discount is a kind of funal discount. It is given to the buyers buying for resale Ex: - Wholesaler or retailer in payment for marketing functions which these traders are expected to perform. Ex:- The manufacturers list price is Rs.120/- he quotes trade discount at 33.33% and 15% from the list price means the wholesaler pays Rs.68/- I.e. Rs.120- Rs.40 (120x33.33) 100 = Rs.80 = Rs.80 - 12 (15% Discount 80 x 15 ) = Rs. 68 100 The wholesaler will quote Rs. 120 – 33.33% i.e., Rs.80 to customers. Cash Discount: It is merely a rebate or a concession give to the trade or consumer to encourage him to pay in full by cash or cheque within a short period of the date of bill.
  7. 7. Ex:-“2%, 10 days, net 30” This indicates that if the invoice amount is paid within 10 days he will get rebate of 2%, but if he pays after 10 days within 30 days, he has to pay full amount of the bill without cash rebate. Quantity Discount: In order to encourage a customer to make bulk or large purchases at time or to concentrate his purchases with a single seller. Quantity discount can reduce the prices for bulk purchase order. Seasonal Discount: The manufacturer may after additional seasonal discount of say, 5%, 10% or 15% to a dealer or to a customer who places an order who places an order during the slack season. Allowances: The manufacturer may offer promotional allowances Ex: - Advertising allowances, window displays, free samples, free display, free training in sales. It amounts to a price reduction of an equal amount of service expected. Psychological Pricing: It is used to create an illusion of a bargain. It is a popular practice of setting the prices at odd points. Rs.99 ……Rs.999/- only.
  8. 8. MODULE – 6 DISTRIBUTION (CHANNEL) Most of producers sell their goods to the final consumer through intermediaries. These intermediaries constitute a marketing channel ( also called as trade channel or distribution channel). Marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption. Several advantages by using intermediaries.  Many producers lack the financial resources to carry out direct marketing.  In some cases direct marketing simply is not feasible. Company would not find it practical to establish small shops throughout the world to sell geem  Intermediaries normally achieve superior efficiency in making goods widely available & accessible to target customers. Functions of Channel: A marketing channel performs the work of moving goods from producers to consumers. It overcomes the time, place & possession gaps that separate goods and services from customers.  They gather information about potential and current customers, competitors land the other actors and forces so marketing environment.  They develop and disseminate communications to stimulate purchasing  They reach agreement on price and other terms so that transfer of ownership or possession can be effected  They place order with manufacturers  They acquire the funds to finance for different marketing channels  They assume risks connected with carrying out channel work  They provide for buyer’s payment of their bills through banks and other financial institutions  They oversee actual transfer of ownership from one organization or person to another person Some functions (physical, title, promotion) constitute a “forward flow” of activity from the company to the customer. Other functions (ordering and payment) constitute a “backward flow” from customers to the company. Still others (information, negotiation, finance and risk taking) occur in both directions.
  9. 9. A manufacturer selling a physical product and services might require three channels: 1) Sales channel 2) Delivery channel 3) Service channel CHANNEL LEVELS 1. CONSUMER CHANNELS: The producers and final customer are part of every channel. a) A zero-level-channel also called as direct marketing channel, consists of a manufacturer selling directly to the final customer. Major examples are door-to-door sales, mail order, telemarketing T.V.selling, manufacturer owned stores. b) A one-level-channel contains one selling intermediary such as retailers c) A two-level-channel contains two intermediaries d) A three-level-channel contains three intermediaries 0 level PRODUCER CONSUMER 1 level PRODUCER RETAILER CONSUMER 2 level PRODUCER WHOLESALLER RETAILER CONSUMER 3 level PRODUCER AGENT W.S. RETAILER CONSUMER 2. INDUSTRIAL CHANNELS: Industrial channels are usually shorter than consumer channels. PRODUCER INDUSTRIAL CONSUMER
  10. 10. PRODUCER AGENT INDUSTRIAL CONSUMER PRODUCER DISTRIBUTOR INDUSTRIAL CONSUMER CHANNEL DESIGN DECISIONS: It might have to use different channels in different markets. 1) Analyzing Customer’s Desire In designing a marketing channel, the marketer must understand the services expected by the target customers. a) Lot size: The number of units, a typical customer purchase on one occasion. b) Waiting time: The average time customers of that channel wait for receipt of the goods. Customers normally prefer fast delivery channels. c) Spatial convenience: The degree to which the marketing channel makes it easy for customers to purchase the product. d) Product variety: customers prefer product variety because more chances of choices will be available. e) Services backup: The greater the service backup the greater the work provided by channel. 2) Establishing objectives and constraints Channel objectives vary with product characteristics. Perishable products require more direct marketing. Non-perishable products require indirect marketing. Products requiring installance or maintenance are usually sold by company channel design must take into account the strengths and weaknesses of different types of intermediaries.